Despite the crisis, the UK financial industry must keep following the sustainability path

Andries Smit explains why companies in the UK financial industry need to take sustainability even more seriously.
October 28, 2022
4 minutes
Andries Smit

"Our house is burning, and we are looking the other way": former French President Jacques Chirac's statement at the Johannesburg Earth Summit in 2002 is more relevant today than ever. Inevitable, indispensable and eminently critical, sustainable development issues are paramount and more and more people, and consumers feel concerned by them.

It’s a fact: the implementation of sustainability policies is essential for companies in the UK financial sector. Today's consumers want companies to have a clear, defined and committed position on it.

According to a study by Eden McCallum, more and more British consumers are ready to change their consumption habits to align with sustainability objectives. The research shows that only 8% of Britons are not concerned about sustainability in their consumption habits, while 61% say they are concerned or very concerned about this issue.

Simultaneously, we are facing an unprecedented challenge with the juxtaposition of the Covid-19 pandemic, the war in Ukraine and the global economy heading for a recession. In this context, are we still able to respond to the climate challenges, or will we put them aside and continue to hope the storm will pass?

Sustainability is no longer discretionary

In an economic crisis, the first thing that large companies tend to do is to cut costs. They start by getting rid of projects that they may consider unnecessary, that have no immediate impact on their bottom line and that many managers think of only as nice-to-haves. Clearly sustainability is not a nice-to-have, it is essential.

Today, there is a genuine concern that larger companies will decide to put sustainability issues on the back burner. And it's not only companies. Some countries have already gone back on these matters and their objectives of reducing their carbon footprint. The UK is a classic example: as we live in an energy and cost of living crisis, the country returns to operating fossil fuel power stations.

In fact, we've reached an odd conundrum: should we save the planet or allow people to stay warm this winter? Admittedly, this is an extreme example, but to a lesser extent, it indicates the exact dilemma many companies will face. Every corporate decision-maker will come across the question rather sooner than later: to cut costs or to continue meeting sustainability goals?

While this question already is a tough one in itself, it is even harder to answer for companies in the UK financial industry. How does one measure the sustainability of a bank account? What is actually a green bank account? Since a bank account is not a tangible thing, does this mean that they should only ensure the servers on which the accounts are located are carbon-neutral? No, we obviously need to go further, but how?

Time to get real

There are two main areas where companies can impact sustainability or at least ensure they reduce their environmental impact.

Internally, they must ensure that they follow clear best practices. That means they need to make sure to accurately calculate the carbon footprint of their buildings, their employees, and their business travels and thereupon at least offset as much. But this is only the bare minimum, reducing its carbon footprint for a company is a good start, but it must also be aware of the other emissions it can have an impact on, such as the ecotoxicity level, the eutrophication or the ozone layer depletion.

Indeed, another major area of improvement for UK financial sector companies concerning sustainability is to clearly understand where the funds they invest are going and that these are in line with climate change mitigation objectives.

Of course, this imposes a considerable challenge: when investors put money in a blue chip company, they know it has the financial and human means to calculate its carbon footprint, but what about lending companies that loan money to small and medium-sized enterprises or individuals? How can they ensure that the latter have targets for reducing their carbon footprint, which they can calculate and implement?

Imagine, for example, a lending company granting a loan to a fishing business. It’s pretty easy for a fishing company to claim itself as sustainable, as a ship doesn’t emit as much CO2 as a plane. But what about its marine aquatic ecotoxicity? Lenders that only focus on CO2 emissions will miss out on this critical point and be, to some extent, accomplices of damaging the environment and the marine ecosystem. Therefore lenders need to put in place strong criteria when they analyse sustainability.

Until there is a proper framework upon which everybody agrees – which could look like a comprehensive credit score done by independent rating agencies – companies are still playing a guessing game. The main problem is that despite the gradual implementation of accounting standards and standards for measuring carbon footprints, many gaps still need to be filled.

The UK financial industry needs to take it a step further

So yes, most of the players in the UK financial industry started tackling the problem, but there is still a lot to do. That is mainly because when talking about sustainability today, the focus is almost exclusively on the carbon footprint. After all, that's what can be measured most easily. But this is only the first part of the issue. Sustainability topics encompass much more than just the carbon footprint factor. Today, consumers are also worried about social and governance matters. That means companies must go much further and hold each other accountable to address the many social, climate and environmental challenges the world faces, which will ultimately help them meet consumers' needs.

Many companies in the UK financial sector have understood this and are introducing new products that help consumers calculate their ESG score based on their purchases and consumption habits. For example, TSB launched a partnership with the carbon footprint-tracking app Cogo to allow their customers to monitor and reduce their carbon footprint by analysing the environmental impact of account transactions and Lloyds is following the same path. Others, such as newcomer Treecard, offer free-of-charge “sustainable bank accounts” with wooden debit cards, and commit themselves to pay 80% of their profits to reforestation projects.

But that’s not all, another trend is to make it easy for retail investors to invest in ESG-compliant financial products. This type of product is increasingly promoted by neo apps that specialise in retail investment, such as Clim8,  but also by more traditional banks, such as Barclays, with clear proposals to invest in companies making electric batteries, solar energy, or companies certified as carbon neutral.

Indeed, investors are more and more concerned about sustainability. According to a study published by PwC, ESG is becoming a critical component of investment decision-making in the UK. Nearly three-quarters of those surveyed consider how a company manages ESG risks and opportunities to be an essential factor in their investment decisions.

Clearly, the UK financial sector has stopped looking the other way and is increasingly concerned with sustainability issues; but it is still essential to continue this effort and to keep innovating in the products offered to consumers.

Sustainability is a fundamental factor which is already reshuffling the deck. Innovators who understand the impact, the urgency and act early will dominate the future and redefine what it means to be market leaders. On the contrary, the companies that don’t step up their game immediately will fall behind.

Photo by Q. Hưng Phạm

Andries Smit

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